Debit cards and credit cards offer consumers and merchants alike a great deal of convenience, flexibility and security. They’re virtually identical in appearance, except that most debit cards have the word “debit” printed somewhere on their face. Nevertheless, there are several significant differences between the two.
Immediate vs. Future Payment
The most meaningful difference is transactions completed with a debit card are immediately charged to a checking account. Credit card charges are charged to a credit account that is paid back over time. This is why debit cards are often called check cards since the amount is immediately deducted from a checking account.
If the funds aren’t available in the checking account, or if the charge will exceed the credit card’s available credit, the charge will be declined. Some banks and credit card companies also impose a penalty fee on consumers who try to make such charges.
Qualify for Debit, Credit Cards
Debit cards are relatively risk-free to issuing banks because transactions cannot be completed if there aren't sufficient funds
Banks conduct a thorough credit check on credit card applicants, though, because they assume a risk that the customers might not pay the bill. Most banks charge additional fees for credit cards, such as an annual membership fee, a monthly service charge and penalties for late payments. Credit card issuers also penalize late-paying customers by increasing the interest rate on any outstanding balance.
Prepaid Debit Cards
Prepaid debit cards are a convenient way to distribute money. Also called stored-value cards, they’re used just like debit or credit cards for point-of-sale transactions and online payments, as well as to get cash from an ATM. They first appeared as gift cards in the U.S. market in the 1970s, and became popular among employers who started using them as payroll cards for their "unbanked" employees in the 1990s. Their growth in popularity accelerated after the turn of the century, as they became commonly available for individual purchase.
There’s no checking account associated with a prepaid debit card, as the bank maintains an account whose funds can only be accessed through the card. These accounts can often be replenished, making them alternatives to a checking account. Prepaid debit cards are less strictly regulated than debit or credit cards, though, and are often associated with numerous fees and charges for everything from withdrawing money from an ATM to checking the available balance. This makes a prepaid card a poor choice for emergency money supplies, since when that rainy day comes, the value stored may have been eroded by various fees.
Prepaid cards are not all equal. Shop around before you buy, and select one whose fees and charges will impact you the least. For instance, if you use your card frequently, look for one with no fees for transactions.
Merchant Fees Charged
Merchants that accept credit cards pay a credit card processing fee for each transaction. For transparency purposes, the fee may expressed as a flat rate and a percentage of the sale. This format is called "
Depending on the payment processor the merchant is working with, fees can vary from a flat rate per transaction to a percentage of the sale plus a flat rate for each transaction. For example, when you buy an item in a store and pay by credit card, the merchant will be charged a certain percentage (1.5 % in this example) plus $0.10 as a transaction fee. For debit card transactions, merchants could be charged 0.5% of the purchase plus $0.21 as a transaction fee.
For more information about debit and credit cards, consult your financial institution. A representative can provide advice about the best option for specific types of transactions.
- Diffen: Debit Card vs. Credit Card
- Barclay's: What's the Difference Between a Debit and Credit Card?
- UniBul Merchant Services: A Brief History of Prepaid Cards
- Washington State Department of Financial Institutions: Debit Cards FAQs
- Consumer.gov: Prepaid Cards
- Cardfellow.com: Interchange Plus Pricing
- BizFluent.com: How Much Do Credit Card Companies Charge Per Transaction to Retailers